Readers of my columns for Accountingweb.com know I often discuss changes introduced by the Tax Cuts and Jobs Act (TCJA). In particular, I devoted an entire one to new rules that prohibit individuals who itemize on Form 1040’s Schedule A from deducting fees for preparation of returns or tax planning.
I’m using this column to provide additional details about the restrictions. They apply to 1040 forms for 2018 that will be filed in 2019. The revised rules are subject to important exceptions that provide partial relief for many taxpayers.
What follows are reminders for accountants, attorneys, financial planners, enrolled agents and other tax professionals on how to explain the changes to their clients. Preparers should tell qualifying clients they remain entitled to claim some of their fees.
How come? Well, the TCJA left unchanged long-standing rules that authorize fee splitting for those portions of tax preparation and planning fees that are allocable to Schedule C (profits or losses from business), Schedule E (income from renting vacation homes or other properties, royalties, partnerships and S corporations) or Schedule F (profits or losses from farming).
Consequently, clients can continue to avail themselves of such fees on Schedules C, E or F to offset business, rental or farming income. They’re similarly allowed to claim fees for fighting audits of Schedule C, E or F activities.
My recommendation: Preparers ought to revise their statements for fees to reflect their charges allocable to Schedules C, E or F. Clients should retain those statements and can claim such charges on their 1040s for the following year.
An example: Sunny von Earhart is a self-employed writer who receives significant amounts of book royalties and payments for magazine articles. She pays preparer Prudence $1,500 in 2019 for the completion of her 2018 return. Prudence tells Sunny that her invoice attributes $900 of the fee to completion of Schedule C and that she will claim it when she prepares the 2019 return.
Tax-savvy Sunny responds that they’re navigating terra incognita. She wonders whether the IRS will accept Prudence’s allocation. I’d say Prudence should tell Sunny that the agency likely will be agreeable as long as the $900 is a reasonable number, as opposed to one that’s frontloaded.
Fast forward to 2020, when Sunny returns to Prudence for the completion of her 2019 return. For 2019, Sunny falls into a 30% federal and state bracket. While she can’t claim any deduction on 2019’s Schedule C for $600 of the previous year’s $1,500 total tax preparation fee, she can claim $900 of it. The write-off reduces her federal and state levies by $270.
Another plus for Prudence and other preparers who seek to ingratiate themselves with their clients and distinguish themselves from ferocious competitors? Many clients will beam when they’re alerted to another positive outcome: The $900 deduction on Schedule C doesn’t just reduce the amount Sunny shows as net profit. It also decreases the amount of her earnings subject to income taxes and any applicable state taxes.
It also decreases the amount of her business income subject to self-employment taxes (otherwise known as Social Security taxes for the self-employed). Sunny, like many other freelancers, shells out more for self-employment taxes than for income ones.
A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 250 and counting).
About Julian Block
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com.